Rates are at a 300 year low apparently so I'd guess they are going to rise. Now, I have nothing to do with trading and don't own any property, so presumably I'm the shoeshine boy.
If you see the USD under 70, be prepared for this time is different, for real.
Banks have huge reserves right now, about 6x historical norm, and are making money in the market due to the low rate they get. When rates rise, that avenue is not as lucrative. They will lend. Each dollar lent has a 10x multiplier on it. They could introduce up to 120% GDP into the money supply.
Also, through what mechanism do you think rate will rise (real or nominal)? It'll have to be with a nudge from the FOMC which implements the monetary policy by buying/selling treasuries from/to the banks. As rates rise, some of those reserves banks have now will get absorbed by the FOMC. Additionally, just because banks have money to lend doesn't mean they're going to throw caution and credit concerns to the wind and start lending again.
- Also, through what mechanism do you think rate will rise (real or nominal)? It'll have to be with a nudge from the FOMC which implements the monetary policy by buying/selling treasuries from/to the banks.
Yes, the Fed will ultimately raise rates, just as Bullard has signaled:
"...he repeated his own expectation that rates will likely need to rise by the end of the first quarter of next year, as inflation recovers to its desired target. That is several months ahead of the summer rate rise many investors now expect."http://www.reuters.com/article/2014/05/16/us-usa-fed-bullard...
- Additionally, just because banks have money to lend doesn't mean they're going to throw caution and credit concerns to the wind and start lending again.
Watch them throw caution and credit concerns to the wind. You will have plenty of time to see that they are doing this before taking an action. I do not have any doubts based on how they have behaved in the past, are behaving now, and how they are encouraged to do so.
>Watch them throw caution and credit concerns to the wind
Banks are under very close scrutiny right now and will be for many years to come. I doubt very much that the next bubble will get inflated exactly where the last one popped.
It would be welcomed if they lend to businesses that invest. But if consumer debt starts rising significantly you can be quite sure that it won't be long until regulators intervene.
The question is how you get businesses to invest when there is no one who can buy more stuff. This is going to be a slow economy for a very long time.
If you're looking at the economy and financial returns, there are a number of factors other than strictly cyclical characteristics of stock market and financial vehicle returns to consider. Pardon the self-link spam, but this is a topic of some interest to me:
There's the Shift Index by Deloitte's Center for the Edge, which shows a long-term secular decline in return on invested capital (ROIC) from 1965 to 2009 by 75%. It's fallen from 6.2% to 1.3%, and is on track to negative returns in a little over a decade. http://redd.it/1y3z3n
There's the relationship of GDP growth to the price of oil (WTI), as portrayed in this FRED graphic from 1945 - 2012: http://i.imgur.com/hfBRw9f.png
Prior to 1974, WTI tracked a very predictable 2.5% price trend. This was the period during which the TRC, Texas Railroad Commission, effectively set the price for oil through extraction (production) quotas. In March of 1971, the TRC lifted those quotas, effectively removing any limits on extraction rates. US oil extraction had peaked. 1971 is the watershed. Oil prices never resume their previous level of stability, and GDP cycles become more random and volatile. Afterward, oil prices are often higher (much of the 1970s and 2000s), sometimes lower (1984 - 1999), but always volatile. The regularity of GDP cyclical trends is lost. http://redd.it/1tz6y2
Though there have been financial panics before, the period from 1929 - 2007 is exceptionally notable for its lack of any widespread panics. There were a few edgy times -- going off Bretton-Woods in 1971, the 1987 stock market crash, the Asian currency crises of the 1990s, but central banks held the show together until 2008 and the fall of Lehman Brothers. Observers such as Michael Lewis, particularly in The Big Short, have commented on the financial restructuring that's sustained paper profits while real wealth growth is questionable. The YC and HN crowd might want to look at where all that magic money making Rails coders so much more valuable than janitors comes from, and how long the music will play.
As for the price of oil and GDP cycles. I am not sure I understand your point. Can you please elaborate?
First world economies are more based around services than industrial production at this point, so while oil is still a hugely important commodity, there have clearly been structural changes in what comprises world GDP.
There's a set of heterodox economic schools which hold that it's principally energy which is responsible for economic growth, and specifically the abundance, const, and convenience of that energy. Hydrocarbons, especially liquid hydrocarbons, are a spectacularly convenient form and store of energy. Electricity is a useful form of energy, though it's not particularly storeable. This has been suggested and explored by numerous economists and others since the early Industrial Revolution, notably: William Stanley Jevons (The Coal Question (1865)), US Navy Rear Admiral Hyman G. Rickover, Kenneth Boulding, Nicholas Georgescu-Roegen, Charles Odum, Charles A.F. Hall, and others. Generally, "thermoeconomics", "biophysical economics", or "ecological economics".
Decoupling of energy (and resources generally) from GDP growth has been argued by numerous authors, though I find their case unconvincing. It's been argued against by others.
Global GDP vs. primary energy consumption shows a pretty strong correlation, and I find the causality argument plausible: http://i.imgur.com/42I4Jmf.png (from Wolfram+Alpha).
As for oil and GDP cycles: my point is that while the price and supply of oil were highly stable, GDP variation was very regular. As oil price and supply began to vary, GDP stability went all to heck.
Just to check - I have long assumed that real "value/wealth" was created through more efficient use of energy / discovery new sources energy (chimney / coal)
I don't have a full or easy answer to that myself yet.
Real value (as opposed to financial value) is created by re-structuring your environment to provide more useful services.
A huge problem with existing economic theory is the failure to account for stock depletion in natural resources (there are other problems, but that's a biggie). So while you can convert stuff in the ground to cash in hand, what you haven't done is to increase your total wealth. You've exchanged your physical stock for financial purchasing power.
You can use those stocks to create more value, but in the case of energy tend to consume it in the process (materials can often be recycled).
You can look at the economic value created by a quantity of energy -- I've done some exploration of this in terms of $billion GDP/quad (quadrillion BTU energy) or $/barrel: http://redd.it/1vlksg
One way of considering a barrel of oil is in how much economic benefit you get from it. In various countries:
US: $1022
China: $528
Japan: $1678
Syria: $498
Egypt: $441
India: $493
Germany: $1465
UK: $1586
Switzerland: $2792
Mali: $4425
Note that industrialized nations tend to get $1000+ per barrel, nonindistrialized ones (Mali excepted) $400-500 or so. Oil's been running around $100 - $120/bbl the past couple of years.
That means the US sees about $9 in returns for each dollar spent on oil, Switzerland nearly $27. Mali sees a large nominal return, but both its GDP and oil consumption are minuscule.
Egypt's in much worse shape: $3.41 in returns per oil dollar spent. India's slightly better ($3.93), China a bit above that ($4.82). But all are running on pretty thin margins. Increased oil prices will push a lot of marginal uses out of reach, and likely shrink their economies markedly. Note that Egypt and Syria in particular are two nations undergoing pronounced unrest -- and which have also recently gone from net exporters to importers of oil. This is a transition described by the Export-land model (https://en.wikipedia.org/wiki/Export_Land_Model).
Yes, increasing your efficiency of energy use is one way to increase wealth, but accessing more (or cheaper) energy is another route. You don't have to be more efficient.
Stock depletion seems like an odd issue in this context - if energy available is a form of value then the laws of thermodynamics basically make everything zero sum
So I would say that turning coal into kinetic energy in a train is an increase in wealth / value for humans. The externalities do need to be accounted for and minimised (climate ch age etc) but otherwise we cannot measure value increase in this seemingly useful way
Given what you have said, where should a US-based person put their savings in order to (1) keep up with inflation, and (2) make a reasonable return (somewhere in the 6-10% range)?
Retail investors are unlikely to beat the market as a whole, so just buy the entire market, hold it forever and keep costs low. For instance, Vanguard's Total Stock Market fund holds almost every publicly traded stock in America (~3700) and is dirt cheap.
But it also makes sense to hedge against the market to some extent, right? Have some amount in safer things (bonds, even money market and/or some t-bill equivalent), things that sometimes go in different directions than the market (eg. commodities). What's a good way to find a balance for that?
John Bogle, founder of Vanguard, recommends "your age in bonds". So if you're 20, make bonds 20% of your portfolio. Some adjust this up or down depending on their appetite for risk (I think age minus 10 is the common advice from Vanguard now).
Finding the right portfolio for yourself is actually a pretty involved question. It depends on your personal situation: Things like whether you have kids, whether you own a house or are planning on buying, what your retirement goals are, etc.
A straightforward bond/stock split has been recommended, and it's probably the simplest but even then there are questions of which bond fund/ETF and which index/equity fund/ETF to choose.
Creating a plan requires understanding what your tolerance for risk is. It doesn't have to take a lot of time [1] and some basic reading and math will enable you to pick what's right for you. Basically, are you willing to tolerate more volatility (i.e. variability in year-to-year returns) in exchange for higher returns in the long-term?
>There's the Shift Index by Deloitte's Center for the Edge, which shows a long-term secular decline in return on invested capital (ROIC) from 1965 to 2009 by 75%. It's fallen from 6.2% to 1.3%, and is on track to negative returns in a little over a decade. http://redd.it/1y3z3n
The comment you are responding too is asking what to do assuming the top-level comment is correct, and the total return on invested capital is, in fact, declining.
Buying a low load index fund is advice that few people are going to argue with, but it doesn't answer the question.
The combination of insurance protection and high return is not something you're going to find. The general argument is to invest in a broad market index (or even a spread of several stocks and/or bonds (6-12 gives a pretty high level of diversification, though a broad index based on the top 100, 500, or 1000 securities is of course even broader).
That will give you protection from volatility in any one security. You won't be protected against general market (or financial system) risk.
There are several bond issues which are specifically inflation-indexed, e.g., TIPS for the US:
For the average investor, who doesn't have copious amounts of time to do research, a low-cost index-tracking ETF would be one of the best investment vehicles.
You would want to tailor your asset allocation to match your risk profile. Furthermore, your timeline (i.e. when you will need access to the funds) will affect your asset choices. If you have a short amount of time (less than five years) it's usually too risky to have a high or even moderate exposure to equities. In fact, if I knew that I would need to spend the money within five years, I would keep a large percentage in safe (i.e. guaranteed) investments.
People don't seem to be reading the actual story posted so let me TLDR it:
Barry Ritholtz has been around and has seen a cycle or two. The economic drivers change but fear and greed still drives the 'melt-ups' and 'melt-downs'. Analyze the market (and what the proper valuation is) in the context of where the economy is now and where it's coming from. Don't dogmatically avoid tech stocks because their valuation multiples are higher than you've been targeting for the last 30 years. Don't buy things just because everyone else is doing it and is making quick paper profits from it.
The old saying of "Bulls make money, bears make money, pigs get slaughtered." is relevant.
Predicting the economy is like predicting the weather. Sure, you can get the short term right very often, but longer term the number of factors and the relationships between them becomes very complex. I would guess "this time it really is different" with supporting reasons has been sung plenty of times before. I'm not convinced. War, plague, drought, social unrest... these things come along and their effects are far reaching. To say nothing of financial disasters (maybe those who control the levers have the machine figured out... then again, maybe not. I don't know).
In the long long term yes... I would guess technology is going to be important and there will be profits. Shorter- long term.... it does seem a bit frothy right now. Short-Short term? Ride the trend until it ends.
Pullbacks happen. Sometimes they are bigger, sometimes smaller. They serve an important function. To separate what is important and deserving of capital from that which isn't. Just don't believe they won't happen because yes... they will. That is never different.
Resource availability is a very important component to economic growth.
But I might point out... they had more resources than we do now in the 1700's. So there are other components. Technology being one of them. Can anyone predict what we will be able to do in 50 or 100 or 200 years? Or what else might happen between now and then?
Gregory Clarke's an economic historian at UC Davis. Among his online lectures is an interesting bit on why the Industrial Revolution was delayed 100,000 years: http://www.youtube.com/watch?v=aalpFYIdqEo
Among factors you might want to consider:
Britain is built on coal. It was washing up on the beaches (the early name for it was "seacoal").
Coal, oil, and gas were known to the ancients. What they lacked was a decent means to haul it any distance. Easier to grow your own hydrocarbons locally than dig them out of some smelly pit a few hundred, or thousand, miles away. So unless you happened to sit right next to a coal pit, tar seep, oil well, or gas jet, you burned wood.
England turned to coal as it was burning through its forests.
We've been prospecting for other resources. We've got a pretty good idea of what there is, and an even better idea of what there isn't.
Joseph Tainter writes on collapse and complexity. Among his points: societies don't adopt complexity unless there's a compelling need (and benefit). It's better to survive at a simple level, much of the time. You'll even see this today in IT.
And by your own statement: we've fewer resources now than humanity had in the 1700s, by virtue of burning our way through them.
Interesting. For the record I agree with you. Resource scarcity is a looming issue and a game changer.
And yet here we are... happily driving our SUV's 50 miles each way to sit at a computer.
(Presumably the Easter Islander that cut down the last tree didn't stop and think "gee, maybe I should have a tiny fire tonight" either.)
So from the point of view of our current way of doing things I do have to say... the long term economic outlook doesn't appear so great. But there are things the "could" happen to change this. A breakthrough in energy (unlikely). A sudden loss of 2-3 billion people from the planet (sadly, more likely). A war resulting in an entirely new social order which is more efficient (or less efficient). Just a lot of factors make it hard to say what will happen.
And the timeline is much shorter than most people think. Oil production is already contracting (conventional certainly, net of unconventional "tight" sources such as fracked oil, possibly).
Exponential consumption rate exhaustion based on GP's Annual Review 2013 is 2048-2049. Which suggests that flow rates (which sustain modern civilization) will start falling precipitously well before then.
For anyone that hasn't read it, I highly recommend 'Irrational Exuberance' by Robert Schiller, a professor at Yale which covers the theme 'This time its different' in depth, in a long term context covering around 200 years of economic data, in particular regarding herding of investors and thought (as sheep herd, then scatter, then herd). One of the interesting observations of the book is that there has been a recession every 10 years for as far back as the data covers (100+ years) +-2 years of the end of each decade.
And as an addendum, I highly recommend "Thinking, Fast and Slow" by Daniel Kahneman. A huge take away for me from that book was that humans are very bad at predicting far into the future, especially when it comes to phenomenon that involve multiple feedback loops.
Finance is a prime example of such a phenomenon where changes in policy, regulation, productivity and a host of other factors that influence financial markets, have their impact only several years down the road. Human mind is such that it impulsively reacts only to recent memory and uses it to extrapolate it to future.
It is a fascinating read, one that got me hooked into the subject matter of human psychology and behavioral economics.
They take a MASSIVE dataset - 8 centuries of data across hundreds of governments - and find the same patterns repeating. Policy makers of different stripes make the same mistakes leading to the same crises, and - when the emergency comes - they try the same failed solutions their forebears tried, often with the indignant claim that "this time it's different!"
Often, the solutions the policy makers are so apt to try just happen to be short-term band-aids, or kick-the-can-down-the-road ways to postpone the hard stuff, or ways to save face and let the next guy be caught holding the bag.
So I was thinking of picking up this book on your recommendation. However, the names seemed vaguely familiar to me already, which reminded me of the scandal where some grad student reran numbers from one of their papers, and found that Reinhart and Rogoff had made basic coding errors in Excel (I think Excel?) running the data (as well as cherrypicking data to some extent). When the data was processed correctly, it actually showed the opposite of what Reinhart and Rogoff had argued for.
Since I obviously don't have time to fact check all the numbers in their book, and they have a demonstrated history of biased results, I think in the end I'll pass on the book. Just my 2 cents.
It is not true that the revised data showed the opposite of what Reinhard and Rogoff argues for. It just showed it to a much lesser degree. The New Yorker wrote a fair but critical analysis:
Was this the same data that was used by IMF and the rest to justify the push the austerity measures on the troubled economies in Europe? I remember there was a big backlash at the time when the numbers came to light but nothing changed anyway (maybe the save face issue above)
My understanding of it is that Rogoff is a great economic historian, but not a great economist. Or something like that. Paul Krugman, for instance, often points out that it's sad R&R are so consistently wrong about how to handle the current crises, because this book was so good.
So the book may be worth reading in spite of the bad research they've been attached to since.
>Often, the solutions the policy makers are so apt to try just happen to be short-term band-aids, or kick-the-can-down-the-road ways to postpone the hard stuff, or ways to save face and let the next guy be caught holding the bag.
Actually it is worse than this. The policy makers all know what needs to be done, but it is against the interests of the powerful. So instead of doing what is right for the bottom 99.9% they do what is right for the top 0.1%.
The policy makers have actually learned a great deal on how to siphon off the proceeds of improved production towards the top 0.1% and have now got it down to an art form. They have even managed to convince us that they don't know what they are doing - rather than listening to what they say, follow the money.
It's worth noting that almost every single person with influence (president, cabinet, congress, scotus, the heads of all the federal departments of ___) is IN the top 1% (usually the 0.1%). Very few government officials (with serious influence) want to help the masses as much as they want to help themselves / their peers.
So any congresscritter who claims they are working for the benefit of the masses has my immediate suspicion. If their track record shows they're telling the truth, that's a different story, and frankly that's what matters anyway, rather than their election-year talking points.
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[ 2.4 ms ] story [ 102 ms ] threadBanks have huge reserves right now, about 6x historical norm, and are making money in the market due to the low rate they get. When rates rise, that avenue is not as lucrative. They will lend. Each dollar lent has a 10x multiplier on it. They could introduce up to 120% GDP into the money supply.
Just one thing to watch these days.
What is the level of 70 for USD?
Also, through what mechanism do you think rate will rise (real or nominal)? It'll have to be with a nudge from the FOMC which implements the monetary policy by buying/selling treasuries from/to the banks. As rates rise, some of those reserves banks have now will get absorbed by the FOMC. Additionally, just because banks have money to lend doesn't mean they're going to throw caution and credit concerns to the wind and start lending again.
US Dollar index: http://www.fxstreet.com/rates-charts/usdollar-index/
- Also, through what mechanism do you think rate will rise (real or nominal)? It'll have to be with a nudge from the FOMC which implements the monetary policy by buying/selling treasuries from/to the banks.
Yes, the Fed will ultimately raise rates, just as Bullard has signaled:
"...he repeated his own expectation that rates will likely need to rise by the end of the first quarter of next year, as inflation recovers to its desired target. That is several months ahead of the summer rate rise many investors now expect." http://www.reuters.com/article/2014/05/16/us-usa-fed-bullard...
- Additionally, just because banks have money to lend doesn't mean they're going to throw caution and credit concerns to the wind and start lending again.
Watch them throw caution and credit concerns to the wind. You will have plenty of time to see that they are doing this before taking an action. I do not have any doubts based on how they have behaved in the past, are behaving now, and how they are encouraged to do so.
Banks are under very close scrutiny right now and will be for many years to come. I doubt very much that the next bubble will get inflated exactly where the last one popped.
The question is how you get businesses to invest when there is no one who can buy more stuff. This is going to be a slow economy for a very long time.
There's the Shift Index by Deloitte's Center for the Edge, which shows a long-term secular decline in return on invested capital (ROIC) from 1965 to 2009 by 75%. It's fallen from 6.2% to 1.3%, and is on track to negative returns in a little over a decade. http://redd.it/1y3z3n
There's the relationship of GDP growth to the price of oil (WTI), as portrayed in this FRED graphic from 1945 - 2012: http://i.imgur.com/hfBRw9f.png
Prior to 1974, WTI tracked a very predictable 2.5% price trend. This was the period during which the TRC, Texas Railroad Commission, effectively set the price for oil through extraction (production) quotas. In March of 1971, the TRC lifted those quotas, effectively removing any limits on extraction rates. US oil extraction had peaked. 1971 is the watershed. Oil prices never resume their previous level of stability, and GDP cycles become more random and volatile. Afterward, oil prices are often higher (much of the 1970s and 2000s), sometimes lower (1984 - 1999), but always volatile. The regularity of GDP cyclical trends is lost. http://redd.it/1tz6y2
Though there have been financial panics before, the period from 1929 - 2007 is exceptionally notable for its lack of any widespread panics. There were a few edgy times -- going off Bretton-Woods in 1971, the 1987 stock market crash, the Asian currency crises of the 1990s, but central banks held the show together until 2008 and the fall of Lehman Brothers. Observers such as Michael Lewis, particularly in The Big Short, have commented on the financial restructuring that's sustained paper profits while real wealth growth is questionable. The YC and HN crowd might want to look at where all that magic money making Rails coders so much more valuable than janitors comes from, and how long the music will play.
As for the price of oil and GDP cycles. I am not sure I understand your point. Can you please elaborate?
First world economies are more based around services than industrial production at this point, so while oil is still a hugely important commodity, there have clearly been structural changes in what comprises world GDP.
There's a set of heterodox economic schools which hold that it's principally energy which is responsible for economic growth, and specifically the abundance, const, and convenience of that energy. Hydrocarbons, especially liquid hydrocarbons, are a spectacularly convenient form and store of energy. Electricity is a useful form of energy, though it's not particularly storeable. This has been suggested and explored by numerous economists and others since the early Industrial Revolution, notably: William Stanley Jevons (The Coal Question (1865)), US Navy Rear Admiral Hyman G. Rickover, Kenneth Boulding, Nicholas Georgescu-Roegen, Charles Odum, Charles A.F. Hall, and others. Generally, "thermoeconomics", "biophysical economics", or "ecological economics".
Decoupling of energy (and resources generally) from GDP growth has been argued by numerous authors, though I find their case unconvincing. It's been argued against by others.
Global GDP vs. primary energy consumption shows a pretty strong correlation, and I find the causality argument plausible: http://i.imgur.com/42I4Jmf.png (from Wolfram+Alpha).
Yes, efficiency has improved, but so has overall consumption: http://i.imgur.com/Hu0NWsI.png
As for oil and GDP cycles: my point is that while the price and supply of oil were highly stable, GDP variation was very regular. As oil price and supply began to vary, GDP stability went all to heck.
Is that the jevons / Rickover etc argument?
Real value (as opposed to financial value) is created by re-structuring your environment to provide more useful services.
A huge problem with existing economic theory is the failure to account for stock depletion in natural resources (there are other problems, but that's a biggie). So while you can convert stuff in the ground to cash in hand, what you haven't done is to increase your total wealth. You've exchanged your physical stock for financial purchasing power.
You can use those stocks to create more value, but in the case of energy tend to consume it in the process (materials can often be recycled).
You can look at the economic value created by a quantity of energy -- I've done some exploration of this in terms of $billion GDP/quad (quadrillion BTU energy) or $/barrel: http://redd.it/1vlksg
One way of considering a barrel of oil is in how much economic benefit you get from it. In various countries:
US: $1022
China: $528
Japan: $1678
Syria: $498
Egypt: $441
India: $493
Germany: $1465
UK: $1586
Switzerland: $2792
Mali: $4425
Note that industrialized nations tend to get $1000+ per barrel, nonindistrialized ones (Mali excepted) $400-500 or so. Oil's been running around $100 - $120/bbl the past couple of years.
That means the US sees about $9 in returns for each dollar spent on oil, Switzerland nearly $27. Mali sees a large nominal return, but both its GDP and oil consumption are minuscule.
Egypt's in much worse shape: $3.41 in returns per oil dollar spent. India's slightly better ($3.93), China a bit above that ($4.82). But all are running on pretty thin margins. Increased oil prices will push a lot of marginal uses out of reach, and likely shrink their economies markedly. Note that Egypt and Syria in particular are two nations undergoing pronounced unrest -- and which have also recently gone from net exporters to importers of oil. This is a transition described by the Export-land model (https://en.wikipedia.org/wiki/Export_Land_Model).
Yes, increasing your efficiency of energy use is one way to increase wealth, but accessing more (or cheaper) energy is another route. You don't have to be more efficient.
So I would say that turning coal into kinetic energy in a train is an increase in wealth / value for humans. The externalities do need to be accounted for and minimised (climate ch age etc) but otherwise we cannot measure value increase in this seemingly useful way
Retail investors are unlikely to beat the market as a whole, so just buy the entire market, hold it forever and keep costs low. For instance, Vanguard's Total Stock Market fund holds almost every publicly traded stock in America (~3700) and is dirt cheap.
John Bogle, founder of Vanguard, recommends "your age in bonds". So if you're 20, make bonds 20% of your portfolio. Some adjust this up or down depending on their appetite for risk (I think age minus 10 is the common advice from Vanguard now).
A straightforward bond/stock split has been recommended, and it's probably the simplest but even then there are questions of which bond fund/ETF and which index/equity fund/ETF to choose.
Creating a plan requires understanding what your tolerance for risk is. It doesn't have to take a lot of time [1] and some basic reading and math will enable you to pick what's right for you. Basically, are you willing to tolerate more volatility (i.e. variability in year-to-year returns) in exchange for higher returns in the long-term?
1. http://www.finiki.org/wiki/Portfolio_design_and_construction
>There's the Shift Index by Deloitte's Center for the Edge, which shows a long-term secular decline in return on invested capital (ROIC) from 1965 to 2009 by 75%. It's fallen from 6.2% to 1.3%, and is on track to negative returns in a little over a decade. http://redd.it/1y3z3n
The comment you are responding too is asking what to do assuming the top-level comment is correct, and the total return on invested capital is, in fact, declining.
Buying a low load index fund is advice that few people are going to argue with, but it doesn't answer the question.
Both financial vehicles and cash presume that the economic system will sustain itself. There's always the possibility it won't.
That will give you protection from volatility in any one security. You won't be protected against general market (or financial system) risk.
There are several bond issues which are specifically inflation-indexed, e.g., TIPS for the US:
https://en.wikipedia.org/wiki/Treasury_security#TIPS
https://en.wikipedia.org/wiki/Inflation-indexed_bond
You're not going to find a 6-10% return on these though, generally.
You would want to tailor your asset allocation to match your risk profile. Furthermore, your timeline (i.e. when you will need access to the funds) will affect your asset choices. If you have a short amount of time (less than five years) it's usually too risky to have a high or even moderate exposure to equities. In fact, if I knew that I would need to spend the money within five years, I would keep a large percentage in safe (i.e. guaranteed) investments.
The old saying of "Bulls make money, bears make money, pigs get slaughtered." is relevant.
In the long long term yes... I would guess technology is going to be important and there will be profits. Shorter- long term.... it does seem a bit frothy right now. Short-Short term? Ride the trend until it ends.
Pullbacks happen. Sometimes they are bigger, sometimes smaller. They serve an important function. To separate what is important and deserving of capital from that which isn't. Just don't believe they won't happen because yes... they will. That is never different.
Near-term economic forecasting is difficult (though there may be some accuracy in the very near term).
Long-term, you can accurately forecast economic trends based on overall resource availability. See the Limits to Growth baseline model.
But I might point out... they had more resources than we do now in the 1700's. So there are other components. Technology being one of them. Can anyone predict what we will be able to do in 50 or 100 or 200 years? Or what else might happen between now and then?
Among factors you might want to consider:
Britain is built on coal. It was washing up on the beaches (the early name for it was "seacoal").
Coal, oil, and gas were known to the ancients. What they lacked was a decent means to haul it any distance. Easier to grow your own hydrocarbons locally than dig them out of some smelly pit a few hundred, or thousand, miles away. So unless you happened to sit right next to a coal pit, tar seep, oil well, or gas jet, you burned wood.
England turned to coal as it was burning through its forests.
We've been prospecting for other resources. We've got a pretty good idea of what there is, and an even better idea of what there isn't.
Joseph Tainter writes on collapse and complexity. Among his points: societies don't adopt complexity unless there's a compelling need (and benefit). It's better to survive at a simple level, much of the time. You'll even see this today in IT.
And by your own statement: we've fewer resources now than humanity had in the 1700s, by virtue of burning our way through them.
And yet here we are... happily driving our SUV's 50 miles each way to sit at a computer. (Presumably the Easter Islander that cut down the last tree didn't stop and think "gee, maybe I should have a tiny fire tonight" either.)
So from the point of view of our current way of doing things I do have to say... the long term economic outlook doesn't appear so great. But there are things the "could" happen to change this. A breakthrough in energy (unlikely). A sudden loss of 2-3 billion people from the planet (sadly, more likely). A war resulting in an entirely new social order which is more efficient (or less efficient). Just a lot of factors make it hard to say what will happen.
Exponential consumption rate exhaustion based on GP's Annual Review 2013 is 2048-2049. Which suggests that flow rates (which sustain modern civilization) will start falling precipitously well before then.
A link to the site, with data sets the book covers freely downloadable: http://irrationalexuberance.com/
Finance is a prime example of such a phenomenon where changes in policy, regulation, productivity and a host of other factors that influence financial markets, have their impact only several years down the road. Human mind is such that it impulsively reacts only to recent memory and uses it to extrapolate it to future.
It is a fascinating read, one that got me hooked into the subject matter of human psychology and behavioral economics.
This Time is Different: Eight Centuries of Financial Folly by Carmen Reinhart and Kenneth Rogoff
http://www.reinhartandrogoff.com/
They take a MASSIVE dataset - 8 centuries of data across hundreds of governments - and find the same patterns repeating. Policy makers of different stripes make the same mistakes leading to the same crises, and - when the emergency comes - they try the same failed solutions their forebears tried, often with the indignant claim that "this time it's different!"
Often, the solutions the policy makers are so apt to try just happen to be short-term band-aids, or kick-the-can-down-the-road ways to postpone the hard stuff, or ways to save face and let the next guy be caught holding the bag.
Since I obviously don't have time to fact check all the numbers in their book, and they have a demonstrated history of biased results, I think in the end I'll pass on the book. Just my 2 cents.
http://www.newyorker.com/online/blogs/johncassidy/2013/04/th...
Yes.
So the book may be worth reading in spite of the bad research they've been attached to since.
Actually it is worse than this. The policy makers all know what needs to be done, but it is against the interests of the powerful. So instead of doing what is right for the bottom 99.9% they do what is right for the top 0.1%.
The policy makers have actually learned a great deal on how to siphon off the proceeds of improved production towards the top 0.1% and have now got it down to an art form. They have even managed to convince us that they don't know what they are doing - rather than listening to what they say, follow the money.
http://en.wikipedia.org/wiki/File:Productivity_and_Real_Medi...
So any congresscritter who claims they are working for the benefit of the masses has my immediate suspicion. If their track record shows they're telling the truth, that's a different story, and frankly that's what matters anyway, rather than their election-year talking points.